Navigating IRS Notice 2014-7: Excluding Medicaid Waiver Payments from Federal Taxes
Unlocking Tax Savings for Caregivers of Individuals with Disabilities
The content for most of these newsletters comes from questions I get. I try to avoid writing about subjects that get a lot of attention, like ABLE accounts, unless I feel that something has been overlooked or misrepresented. Instead, I focus on topics I think families and professionals should know about but don’t seem to get much press. This week I’m going to dive into IRS Notice 2014-7’s treatment of Medicaid Waiver payments.
A significant number of states will pay parents to care for their adult children who have qualified for a Medicaid Waiver. There are also a few states that will allow parents to be paid caregivers of their minor children. If either of these situations applies to you, you may be able to exclude what you are paid from your Federal Income taxes. This does NOT mean you can automatically avoid paying Social Security and Medicare taxes. Keep reading, I’ll explain why and include a link to the IRS Pub later.
First, some background about IRS Notice 2014-7. It started with qualified foster care payments being excluded from the gross income of a foster parent. These payments are for “difficulty of care” and are associated with the additional care required of foster children with disabilities (physical, mental, or emotional). To be counted the care must be provided in the foster parent’s home, the state has to agree there the child has a qualifying disability, and the income has to be identified as “difficulty of care payments”.
State agencies, Medicaid Waiver providers, and individual care providers asked to have Medicaid Waiver payments to support individuals with disabilities classified as difficulty of care payments for any caregiver (related or not) supporting an individual in their own home, thus keeping them out of an institution.
In January 2014 it was determined that Medicaid Waivers and state foster programs share the objective of keeping individuals out of institutions. Further, both difficulty of care payments and Medicaid Waiver payments are what allow individuals to stay out of the institutions. IRS Notice 2014-7 was meant to “achieve consistent federal tax treatment of Medicaid Waiver payments among the states and individual care providers” (Internal Revenue Bulletin: 2014-4). Now here we are.
Keep reading with a 7-day free trial
Subscribe to Waypoints to keep reading this post and get 7 days of free access to the full post archives.